A strategic delinquency occurs when a homeowner purposefully allows their mortgage payments to become 60 days late, usually shortly after property price drops eliminate much of their equity while they’re attempting to keep other debts repaid. In other words, as homeowners continue to lose equity in their homes because of the dropping property prices, many of them are making the strategic decision to not pay their mortgage in order to keep up with other financial obligations. According to JPMorgan analysts, approximately 12,000 to 14,000 strategic delinquencies have occurred per month during the past year. As a result, strategic delinquencies now comprise as much as 27% of the total new late payments in the United States, rising up from only 20% just a year ago.
Analysts believe that many Alt-A and prime borrowers are choosing to go delinquent even though they have the means to continue making repayments towards their mortgage. Amherst Securities Group Analyst Laura Goodman believes that lenders and financial institutions need to focus on reducing principal in order to provide incentive for homeowners to avoid delinquencies and begin stemming the current foreclosure crisis, which could threaten another 10 million properties if such measures are not taken.
According to recently released Bloomberg data pertaining to August bond reports, a record high of nearly 33% of the $1.2 trillion in securitized nonagency loans have either become at least one month delinquent, are currently in foreclosure, or have already been seized. These statistics not only reflect the decisions of homeowners to go delinquent strategically, they also indicated that there has been a significant slowdown in loan liquidation. According to a recent S&P index, home prices in and around 20 of the largest US cities have dropped more than 30% since their peak in July 2006.
According to Freddie Mac and Fannie Mae analysts, the number of loans that are larger than the limits defined by the federal government for which loans would be backed, is up to almost 40% from 30% a year ago. This statistic indicates that lenders are becoming increasingly dependent on borrowing by applying for more of these “jumbo” loans. The share of Alt-A loans that are expected to be defaulted on strategically has risen from 30% to 35%, while the number of subprime loans that are expected to be defaulted on strategically has also risen similarly from 20% to 25%. In terms of loan amounts, 15% of loans less than $100,000 may be of are at risk for being strategically defaulted on, while 35% of loans larger than $400,000 are likely to be liquidated due to strategic delinquencies.
Surprisingly, individuals with the highest credit scores account for approximately 40% of the strategic delinquencies, while individuals with low credit scores account for only approximately 20%, confirming the suspicion that some of the more sophisticated borrowers are strategically defaulting on mortgage loans to focus on repaying other debts. Because of the high number of strategic delinquencies on nonagency securitized mortgages, approximately 10,000 homes per month are being liquidated, a statistic that has been steady for the past several months. According to Federal Reserve data, the loans that have been strategically defaulted on account for approximately 12% of the overall US home-mortgage debt.
Meanwhile in late September, the California Attorney General said that she would reject the proposal for a nationwide settlement with banks pertaining to foreclosure practices, based on her opinion that the proposed agreement was “inadequate.” According to CoreLogic Inc. (a California real estate data provider), there are nearly 11,000,000 homes that may be foreclosed on within the near future in California, which comprises more than 22% of all the homes in the state have a mortgage. Unfortunately, J.P. Morgan analysts believe that property values will most likely drop another 7% before hitting rock bottom next year.
Credit reports are requested by prospective lenders, credit card companies, and even employers to determine the financial stability of applicants. Whether you’re trying to apply for a profitable job position, obtain financing for your dream home, start a new business endeavor, or simply apply for new credit card, you’ll need to ensure that your credit report is free of negative items and accurately reflects your financial history. Although credit reporting agencies like Experian, Equifax, and TransUnion typically do an excellent job of maintaining the accuracy of their reports, there are some instances in which erroneous items may be filed. Luckily, it is relatively easy to dispute inaccurate information, provided you have the proper documentation and understanding.
Items That Can Be Disputed on a Credit Report
While it is not possible to dispute the credit score itself, you may be able to have negative items removed from your credit report if it can be shown that they are an accurate in any way. After the items are removed your credit score should improve within 30 to 90 days, depending on how long after a new score is issued. The following are items that may be able to be disputed:
It is not uncommon for outdated items pertaining to delinquencies and defaults to be found on a credit report, even after the debt has been fully repaid. In addition, any debts that are older than seven years should not remain on the credit report, and can be removed if brought to the attention of the reporting agency.
Many times credit card companies or financial institutions will issue a negative item on a cardholder’s credit report even though the payment was submitted on time. It may be possible to have these notations related to late payments removed if you can prove that they are an accurate. Thus, it’s best to make credit card payments with automated bank transfers or checks that can be recorded and documented in the event that proof is needed during the dispute.
- Items Caused by Fraudulent Activity
Unfortunately, credit card fraud is becoming increasingly common as fraudsters invent new ways to obtain credit card details over the Internet. Nowadays it is possible for fraudulent activity to go unnoticed for months or even years at a time if you do not closely scrutinize your credit report. Some credit reporting agencies will make the mistake of filing a negative item on your report because someone with a similar name defaulted on one of their loans. Luckily, after being brought to the attention of credit reporting agencies most cases of fraud are removed from the credit report and the credit score returns to normal shortly thereafter.
Filing a Dispute
To maximize your chances of success when filing a dispute with a credit reporting agency it is important to include the proper documentation along with your dispute letter. Although it is possible to file a dispute via e-mail or phone, for the best results it would be advisable to write a formal letter that describes the erroneous/inaccurate item, and why you believe it should be removed from your credit report. Ideally, you should attach a copy of any statements that relate to the negative item (if applicable), and include a copy of the erroneous credit report with the questionable information highlighted or circled to simplify the job of the person responsible for reviewing your dispute. By filing a dispute in writing with the appropriate documentation attached you can prove that steps were taken to dispute a negative item in the event of a legal suit.
Recent reports indicate that more than 50% of cardholders are now paying penalty interest rates on their card balance. When the interest rate applied to a credit card balance or certain transaction types is suddenly raised this is called repricing. Sadly, the majority of cardholders that are dealing with credit card repricing are not even sure why the penalty interest rate was applied in the first place. Although many times a credit card company will simply charge a one-time fee to penalize a customer for late payments or not paying the minimum amount, in some cases they may apply a permanently raised interest rate. The following paragraphs outline the common causes of interest rate penalties and credit card repricing, as well as how to prepare for and deal with repricing.
What Causes Credit Card Repricing
Credit card repricing is not always understood by cardholders that are subjected to interest rate penalties, but sometimes the cause of the penalty can be disputed with success. In most cases, credit card companies will hike the interest rate due to a late, insufficient, or missed repayment. However, it is also possible for repricing to be caused by regional economic factors, such as bank interest rates. All credit card companies and lenders have the right to raise interest rates at any time as long as they provide at least 14 days notice to the cardholder or borrower. Thus, it is important to check your mail on a regular basis and be on the lookout for notifications from your card company, so that you may dispute repricing as soon as it becomes evident.
Preparing for Repricing
Fortunately, it is possible to adequately prepare for credit card repricing and minimize the possibility of incurring unnecessary debt by understanding the terms and conditions of promotional periods, interest rates, and repayment requirements. It is important to know the expiration date of the promotional period, as this will help you prevent the possibility of being caught off guard and conducting a lot of transactions while you’re under the false assumption that your balance is incurring the 0% introductory interest rate. It is also important to note that some transaction types automatically carry different interest rates than general purchases. For example, a cash advance can carry interest rates as high as 20% APR or more, even if the same card has a 0% APR introductory rate for balance transfers and other transaction types. It is becoming increasingly difficult to avoid penalty interest rates due to the universal default clause, which allows credit card companies to apply penalties to cardholders for defaulting or making late payments on any of their credit cards.
How to Dispute Penalty Interest Rates
It is imperative to dispute any unexpected repricing or interest rate penalties as soon as they’re noticed, especially if you’re not sure why the interest rate has been changed. The first step to disputing penalty interest rates is determining the cause by submitting an inquiry to your credit card company either via e-mail or phone. Anyone that frequently utilizes one or more lines of credit should closely examine their monthly statements and always strive to understand any changes in their account status or interest rates. If you find that your card’s interest rates have been risen unjustifiably it is best to write a formal letter or e-mail to request that the rates be returned to the standard or introductory APR if possible. Before zealously disputing a penalty interest rates caused by a late payment, it is important to realize that credit card companies penalize cardholders based on when a payment is processed.
Repaying multiple credit card debts or loans can be a hassle for anyone that is not a professional accountant, but many tend to underestimate the challenges associated with balancing ongoing monthly bills and several debts that are accumulating interest at increasingly high rate. Because most cardholders are subjected to penalty interest rates after a late or missed payment, it is not uncommon for one to have two or more credit cards with outstanding debts that carry an APR of 20% or more. The key to escaping debt quickly, with a minimal amount of interest paid, is to consolidate the debts to centralize and simplify monthly repayments.
Using Balance Transfer Credit Cards
The best way to consolidate the balances of several credit cards to a single account is to utilize the benefits of a balance transfer credit card. Balance transfer cards are called so because they do not carry balance transfer fees, which can range from 2 to 5% of the total transaction amount each time a balance transfer is conducted. In addition, balance transfer credit cards often have 0% APR introductory periods, allowing the cardholder to begin making repayments towards their newly transferred balances without any interest charged. If you can manage to repay all of the transferred debts before the introductory rate expires, you may be able to avoid all future interest. Keep in mind that it may be difficult to receive approval for an ideal balance transfer credit card after your credit score has already been damaged, so it would be ideal if you already had an open balance transfer account to use.
Using Standard Credit Accounts
If you’re unable to obtain approval for a balance transfer credit card, it may still be beneficial to use standard credit account, depending on the cost of the balance transfer fees and how much interest could be saved,. For example – If you currently owe $600 on a credit card that is being charged 20% interest, and you have another credit card account that is currently incurring the introductory rate, yet has balance transfer fees of 2% of the transaction amount, it would still be advantageous to transfer the balance and consolidate the debt. On the other hand, if the card that is being charged 20% APR only has an outstanding balance of $300, and the balance transfer fee is 5% of the transaction amount per transaction, then it would not be beneficial to conduct the transfer. As a rule of thumb, as long as the account that is being used to centralize the debts carries a lower interest rate than all of the other accounts and does not have exuberant balance transfer fees, then it may be advisable to consolidate debts using that account.
Using Loans with Lower Interest Rates
In rare cases, it may be possible to obtain approval for a loan that carries lower interest rates than one or more of your current outstanding credit accounts. Unfortunately, once the credit score has been damaged it is often difficult, if not impossible, to find a lender that will approve you for a loan that has better terms and conditions than the credit cards that you are currently trying to repay. If you’re interested in using loans to consolidate credit card debts, it would be best to avoid those that have strict penalties such as payday loans, as these could be detrimental to your debt reduction efforts by causing more debt to accumulate. It may also be possible to find a close friend or family member that is willing to obtain or cosign for a better loan to help you consolidate your debts.
Trying to overcome the challenges associated with credit card debt can be a difficult task for anyone, especially if you’re already committed to other financial obligations. As new expenses and bills continue to accumulate, it can become an overwhelming task to make repayments towards existing debts without making late payments towards other bills.
In fact, simply avoiding a declining credit score may seem impossible, let alone attempting to obtain an exceptional credit score. Unfortunately, many people make unnecessary mistakes when rebuilding their credit due to the pressure of having to figure out a way to escape the debt quickly before the interest compounds and the debt increases exponentially. The following are some common credit rebuilding mistakes to avoid.
Applying for New Loans
While applying for a new loan to pay off all of your existing debts simultaneously may seem like an appealing option, it simply creates a new debt, which in many cases accrues interest at a higher rate than the original credit card debt. If you have poor credit it is very likely that you’ll only be able to obtain approval for loans that carry higher interest rates and stricter terms than your current credit agreement.
While the average credit card carries an APR of about 12-18%, bad credit loans like paycheck advances can carry interest rates as high as 30% or more, and are notorious for having overly strict interest rate penalties that are applied after a single late payment. Thus, rather than applying for a new loan and creating a new high-risk debt to pay off your existing debts, it would be advisable to pay off the card balance gradually. For example, if you currently owe a $500 balance on a credit card with an interest rate of 18% APR, you could repay it over 11 months at the cost of approximately $50 per month (with about $45 allocated to interest).
Many people make the mistake of using too much of their available credit, under the presumption that making more purchases and then repaying their balance in full at the end of each month will give them accelerated results. Although it is possible to significantly improve the credit score by consistently using about 30-50% of your credit line and paying off your balance in full each month, using more than half of your available credit for several months consecutively may signify financial desperation from the perception of financial institutions, and therefore often leads to degradation of the credit score.
Instead, it would be better to have 2 or 3 cards, and then utilize approximately 30% of each credit line each month, primarily through smaller purchases, making sure to repay the balance in full and on time every month. By using several cards to conduct smaller individual transactions and never carrying over balances you can safely maximize the number of repaid transactions and expedite the process of rehabilitating the credit score.
Consolidating all of your outstanding credit balances to a single card that has a 0% introductory rate is perhaps the best way to centralize monthly repayments, while also reducing the amount of interest that accrues on your overall debt. However, many credit cards carry exuberant balance transfer fees that can negate the interest saving benefits of transferring balances to the card. It should be noted that it is possible to further damage the credit score by closing too many accounts at once, so it would be advisable to leave a small balance in each account so that they remain active.
Ultimately, determining whether to conduct balance transfers to consolidate the balances of several cards to a single card would have to depend on the rates, terms, and conditions of the balance transfer card.
While there are a number of nonprofit organizations that are set up to provide honest debt counseling, there are just as many if not more that are simply looking to turn a profit. Unfortunately, these ‘debt counselors’ are usually nothing more than loan sharks or affiliate sites online that want to earn a nice juicy commission off the loan they sell you. Here are a few words of advice gathered from bankruptcy lawyers who are in the business of protecting consumers from losing everything they have worked so hard for all their lives.
The Truth about Debt Consolidation Loans
One of the ways in which less than reputable debt counselors will try to take advantage of you is to talk you into a debt consolidation loan. There are times when these actually may be a good idea, but if you are in serious trouble financially it is doubtful that you would qualify for a loan that would be advantageous to you. For example, some credit card companies offer to let you transfer all your other outstanding credit card debt for 0% interest. Be watchful of these offers because that zero interest is only for a short period of time and you may end up paying higher interest when the introductory period is over.
Home Equity Loans Can Cost You Your Home
Another type of loan that will often be recommended by the so-called credit advisors is a home equity loan. Bankruptcy lawyers are the first to tell you that these loans are dangerous. The reason for this is simple. If you owe unsecured debt such as credit card debt, the only thing they can do is report you to the credit bureau, perhaps sue you in court and maybe garnish your wages if they are successful in court. Unless you owe tens of thousands of dollars, most creditors won’t go through the trouble.
They could sue you and they could win, it is a very real possibility, but they cannot take your home. If you have out of control debt but have equity in your home, it is not advisable to try to pay it off with a home equity loan. What happens if you can’t pay the loan? The mortgage lender can foreclose on your home. You will still have all that debt in one loan but you will be homeless as well.
Debt Settlement Programs to Watch For
Most debt settlement programs charge a fee for their services. They advertise debt counseling as being free, which by law it is supposed to be. Where they get you coming and going is in the fees they charge to settle payments for you. These types of organizations offer to negotiate settlement with your creditors and they assure you that they can get your balances reduced. Perhaps they can, but they don’t tell you that any money they collect from you pays them first for their services and once their fees are met they begin paying your outstanding debts.
If you think about this logically, you end up paying more than you owe in outstanding debt. It is far better to call your creditors directly to see if they will negotiate a deal or payment plan with you and then stick to it. Don’t’ turn your money blindly over to a third party without trying to first settle your debts directly with the creditor. In the end, it is ok to speak with credit counselors. Listen to what they have to say, but keep in mind that most of these organizations are out to make a profit from ‘helping’ you settle your debts. As the old saying goes, “Don’t jump from the frying pan into the fire.”
Many people think that having an excessive amount of credit is actually a bad thing in the long run. For some people this may be true. However, for those who are able to manage their money and treat their credit cards as if they are cash then having an abundance of credit may not be the worst thing. The problem seems to be in relying so much on your credit that you wind up in severe debt. Unfortunately, this does happen to many people. The three reporting agencies, Equifax, Experian and TransUnion look at many different factors when assessing your credit score. It isn’t just about the debt you have on your report or how much you owe but also how your payment habits are. For example, do you keep your charging down to under 30%? Do you pay your credit card bills off in such a way that you stay under a specific percentage of debt?
How to Use Credit to Your Advantage
The first thing you need to understand is that having credit in today’s world is extremely important. However, you must also keep in mind that there are right ways to utilize your credit and then there are irresponsible methods of using your credit. A smart spender and someone capable of holding a large amount of credit, will be able to use credit to his/her advantage. What is the best way to do this? This is quite simple. First, you have to assess the amount of credit you have. Let us say you have $40,000 in credit, you spend only $4,000 of that and then pay it off promptly, you have kept your ratio down to 10%. This is very good in the eyes of creditors.
Making Major Credit Mistakes
One thing that many people do the moment they begin to build their credit is start applying for too much credit. Either they are so excited to have this new found credit or they are just overly enthused but one thing is for sure, applying for too much credit too fast looks very bad in the eyes of lenders. Why is this true? It is true for a couple of different reasons. First of all, any time you apply for new credit, your credit is pinged. This means that your score lowers just a bit for each ping. This makes you appear desperate and gives lenders the impression that you are about to take out a massive amount of credit that you will not be able to pay back. Not only can this cause your score to decline but it will also more than likely cause you a few denials.
It is always best to choose credit cards that have incentive programs attached to them. All of the major credit card companies offer cards that have special reward offerings. The best types of credit cards to apply for are the ones that offer the best perks. Many people who have high credit limits and multiple credit cards realise a number of benefits from frequent flier miles to discounts in hotels and restaurants. The more rewards your card comes with the better off you are. Having credit is a big responsibility and you want to be sure that you get the most out of whatever credit lines that are extended to you. Stay away from ridiculously high interest rate credit cards and try to stick to those that offer promotions in terms of lower rates for specific amounts of time. Doing this will help you to keep your credit in tact while saving you a significant amount of money.